As a meeting of the Council of the European Union (ECOFIN) on 23 May 2017 European finance ministers agreed on a final text for the proposed Directive on Double Taxation Dispute Resolution Mechanisms (the “Proposed Directive”).

The proposal seeks to improve the dispute resolution mechanisms available within the EU in the case of double taxation disputes. It will build on the existing Union arbitration Convention. A critical feature of the new proposals is the extension of the scope beyond purely transfer pricing disputes to all taxpayers that are subject to taxes on income and capital covered by bilateral tax treaties and Union Arbitration Convention.

The Proposed Directive seeks to increase the taxpayer’s role in the process and implement more efficient and timely procedures. In this regard, it is a crucial development that the Proposed Directive prescribes mandatory binding arbitration within specified time limits.

The final text agreed by the Council contained the following final compromises made on the following issues:

The Council agreed on a broad scope but with the possibility, on a case-by-case basis, of excluding disputes that do not involve double taxation;

In relation to ‘independent persons of standing’, who can be appointed as arbitrators, it was agreed that arbitrators must not be employees of tax advice companies or have given tax advice on a professional basis, this is to ensure the independence of the process. Unless agreed otherwise, the panel chair must be a judge;

The possibility of setting up a permanent structure to deal with dispute resolution cases if member states so agree.

Member States will have until 30 June 2019 to transpose the Proposed Directive which will apply to tax years beginning on or after 1 January 2018 (or earlier if Member States wish).

The Council will formally adopt the Directive once the European Parliament has given its opinion.

CCTB was also on the agenda at ECOFIN with Ministers putting forward their country’s positions in relation to the new proposals.

The Maltese presidency confirmed its intention to continue discussions on new elements of the proposal, and that an appropriate degree of flexibility should be provided for. It was also reaffirmed that the separate proposal on tax consolidation (CCCTB) will be considered without delay once the CCTB rulebook has been agreed.

The proceedings related to French tax legislation, which imposes a contribution in addition to corporation tax on amounts redistributed by a recipient of dividends from a subsidiary. A group of French companies challenged the constitutionality of this additional contribution and claimed it impugned Article 4 of the Parent-Subsidiary Directive (the “Directive”). The ECJ ruled that this was incompatible with Article 4 of the Parent-Subsidiary Directive.

It ruled that the objective of the Directive was eliminating double taxation of profits distributed by a subsidiary to its parent company at the level of that parent.

Rejecting the argument of the French and Belgian Governments, the Court held that whether the tax applies to the distribution or the redistribution is irrelevant on the basis that article 4 stipulates that Member States of the parent company or permanent establishment are to “refrain from taxing such profits”.

Furthermore, regardless of the form or classification it takes (whether it is called corporation tax or not), any measure which is in effect a taxation of profits in excess of 5% is contrary to the Directive.

In a similar vein to the French case, the ECJ issued a ruling on the same day against Belgian tax legislation known as the ‘fairness tax’ on the grounds it contravened the Parent-Subsidiary Directive (the “Directive”).

The legislation at issue is not classified as corporate tax but a separate tax assessment of 5.15%, which is levied on a dividend distribution when distributed profits (or part thereof) have not been subject to tax under the ordinary Belgian corporate income tax rate.

The tax may arise when in the same taxable period, dividends are declared but the taxable basis is reduced by the application of the notional interest deduction or tax losses carried forward so that the taxable profits are wholly or partly reduced. The legislation aims to subject such income falling with the Belgian tax jurisdiction to this tax.

The fairness tax was challenged on the basis that it constituted:

a restriction on the freedom of establishment therefore violating Article 49 TFEU;

a withholding tax and violated Article 5 of the Directive;

a contravention of Article 4 of the Directive

The ECJ held that the ‘Fairness Tax’ is contrary to Article 4 of the Directive on the grounds that the effect of the legislation was to impose a tax in excess of 5% limit prescribed by Article 4 and also on the grounds that it results in double taxation contrary to the Directive.

The other two grounds were not successful. The Court held that it did not constitute a withholding tax and therefore did not violate Article 5 of the Directive. In reaching this conclusion, the Court held that the tax did not satisfy the three criteria to constitute a withholding under Article 5 of the Directive. In addition, it found that the tax was levied on the distributing company and not the holder of the shares and could not violate Article 5.

The Court held that the freedom of establishment does not preclude such legislation. This is on the basis that pursuant to such legislation both a non-resident company conducting an economic activity in that Member State through a permanent establishment and a resident company (including a subsidiary of a non-resident company) are equally subject to a tax such as the ‘fairness tax’ on the distribution of dividends which are not ultimately included in the taxable profits due to use of deductions.

The European Commission is hosting a conference on tax fairness in Brussels on 28 and 29 June. The conference is part of the new training launched by the Commission in 2017 for civil society on international and EU corporate tax issues.